For decades a prime piece of Loop property has captured the imagination of developers, politicians and retailers. And in their imaginations it flourished.
The reality has been marred by disappointment.
Block 37, as the property is known, stymied developer after developer trying to bring to life the parcel of dirt bounded by State, Dearborn, Washington and Randolph streets.
Now, just weeks before the first stores were finally scheduled to open their doors, Block 37 is in trouble and its future is in doubt. Again.
Bank of America and a group of lenders are moving to foreclose on the retail and transit portion of the mixed-use development, claiming Chicago developer Joseph Freed and Associates LLC has, in essence, run out of money, according to a lawsuit filed Monday in Cook County Circuit Court.
Freed issued a statement Tuesday calling the banks’ lawsuit a “misguided action that could halt the project” and make it “near-impossible to restart.”
The clash marks a significant setback for the revitalization of shopping along State Street. It also signals that the long-anticipated commercial real estate bubble is beginning to pop as banks are forced to revalue big commercial properties.
“It’s probably the tip of the iceberg of banks taking properties back,” said Ross Glickman, chairman and chief executive of Chicago-based Urban Retail Properties, who was involved in the Block 37 project in the 1990s.
The banks have been negotiating with Freed since March, when the developer technically defaulted, the lawsuit said. Since then, cost overruns had reached “at least” $34 million as of Aug. 25, court documents said. Freed owes $128.5 million on a $205 million construction loan, the filing stated.
Bank of America is asking the court to appoint a receiver to manage the property and get the construction completed. The office portion, developed by Golub & Co., already has opened.
Commercial real estate values have fallen, on average, 40 percent since the middle of 2007, leaving hundreds of billions of dollars of commercial real estate deals underwater, said Jim Sullivan, managing director of Green Street Advisors, a real estate research firm. New developments are particularly vulnerable because they aren’t generating enough cash flow to cover payments on loans, he said.
“For banks, the issue is, ‘How do we minimize the loss?'” Sullivan said. “Typically the way to do that is to get control of the property, re-price it, sell it and move on.”
Freed is fighting to keep the project on track. It said the retail project is 70 percent leased, with Zara, Puma, Anthropologie, Steve Madden and Swarovski among the shops ready to open next month. Freed said in its statement that the lawsuit “lacks merit” but declined to comment on the financial picture alleged by Bank of America.
The late Mayor Richard J. Daley set the Block 37 project in motion in the 1970s. He was the first to envision turning a motley mix of old office buildings and rundown movie houses into a family-friendly attraction in the heart of the Loop.
The buildings were razed in 1989 but the block remained empty land, used at various times as an ice rink and for an arts festival. Over the years prominent architects and real estate developers have been associated with the project, but it never got off the ground.
Freed took over the retail and transit portions of the Block 37 project, located at 108 N. State St., in April 2007 after the previous developer, The Mills Corp., ran into financial problems. At the time, the economy appeared healthy, consumers were spending and hopes ran high that Freed would break the jinx.
Then the recession hit. Major chains balked at paying $100 to $150 a square foot in rent for an untested mall on a shopping strip known for discount chains such as Nordstrom Rack. The retail complex’s unconventionally shaped retail spaces made it costly for chains to retrofit their cookie-cutter store designs. And a long-standing mandate by the city to bring in unique boutiques restricted the universe of potential tenants.
David Barton Gym, the first and largest tenant, pulled out in November. By March, as the stock market entered its dark days, efforts to land an Apple store fizzled and yoga wear chain Lululemon dropped plans to open.
The city has invested about $68 million over the life of the project to help get it built, said Molly Sullivan, a city spokeswoman.
“Our hope is we can work this out and keep this project going,” she said.
Bank of America, as the lead lender, holds $65 million of the $205 million loan. The Charlotte, N.C.-based bank has been working with Freed for more than a year, spokeswoman Shirley Norton said. “This has been a difficult economic period for developers.”
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Blocked again
Block 37’s struggles:
1989: The block’s buildings are razed to make room for an office and retail complex hailed as “Water Tower Place South.”
2002: Frustrated that nothing has been built, the city of Chicago pays $35 million to take the project back from the developer, a venture led by JMB Realty.
October 2004: The city selects The Mills Corp. as developer. Mills buys the parcel for $12.3 million.
January 2006: Mills discloses an SEC inquiry into its books.
August 2006: Mills sells Block 37’s office and residential areas to Golub & Co.
November 2006: Mills sells Block 37’s retail and transit portions to Joseph Freed and Associates.
March 2007: Mills cancels Golub’s rights to build the residential portions and gives them to Freed.
July 2007: The anchor tenant of the office phase, Morningstar Inc., sues Mills, saying the amount of space it had agreed to lease was smaller than the actual space.
November 2007: Freed announces it has five tenants for the retail section of the project: David Barton Gym, a multiscreen cineplex, two restaurants and a Club Monaco clothing store.
April 2008: SKG Equity Partners becomes the third office tenant, joining Morningstar and WBBM-Ch. 2.
June 2008: The CTA halts plans to build beneath the block a “super station” for high-speed trains that would travel to and from the city’s airports. WBBM-Ch. 2 announces it will delay moving into Block 37 until September.
July 2008: Freed announces five more tenants for the retail portion, bringing it to 50 percent leased.
November 2008: David Barton Gym announces it is pulling out of the project.
March: A second retail tenant, yoga clothier Lululemon, pulls out.
May: Puma announces it will open a store in Block 37.
Monday: Weeks before the first retail shops were to open, several lenders file a lawsuit seeking to foreclose on the retail and transit portion.
SOURCE: Tribune reports
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